3. The Dynamics of Multilateral Development Banks in Latin America and the Caribbean . 14
3.2 Delicate Balances: Financial Strength, Low-Cost Lending and Services, and
MDBs have been building a strong financial position, and years of responsible management are reflected in their financial statements. Table 2 presents the risk-bearing capital ratio
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Table 2: Financial Indicators of Multilateral Development Banks (US$ million) and their Risk-Bearing Capital Ratio (points), 2002–2011
of MDBs and the World Bank in the LAC region, and three trends emerge that point to a healthy dynamism at the subregional level.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
World Bank Group
Net loans 116,075 111,762 105,626 100,910 100,221 95,433 97,268 105,698 120,103 132,459 Paid-in 11,476 11,478 11,483 11,483 11,483 11,486 11,486 11,491 11,492 11,720 Retained earnings 22,227 27,031 23,982 27,171 24,782 27,831 29,322 28,546 28,793 29,723
RBCR 3.44 2.90 2.98 2.61 2.76 2.43 2.38 2.64 2.98 3.20
Inter-American Development Bank
Net loans 46,397 50,472 49,643 47,960 45,842 47,903 51,037 57,933 62,862 65,980 Paid-in 4,340 4,340 4,340 4,340 4,340 4,340 4,399 4,339 4,339 4,399 Retained earnings 9,883 12,288 13,437 14,199 14,442 14,576 14,647 15,481 15,771 15,488
RBCR 3.26 3.04 2.79 2.59 2.44 2.53 2.68 2.92 3.13 3.32
Corporación Andina de Fomento
Net loans 5,806 6,328 6,863 7,128 7,849 9,333 9,990 11,487 13,572 14,773 Paid-in 1,171 1,319 1,499 1,682 1,871 2,015 2,176 2,486 2,814 3,229 Retained earnings 771 888 1,074 1,316 1,565 1,878 2,097 2,262 2,323 2,382
RBCR 2.99 2.87 2.67 2.38 2.28 2.40 2.34 2.42 2.64 2.63
Caribbean Development Bank
Net loans 462 513 637 687 718 750 769 818 994 Paid-in 156 156 156 156 156 157 157 157 207 Retained earnings 234 256 277 296 314 349 423 408 449
RBCR 1.19 1.24 1.47 1.52 1.53 1.48 1.33 1.45 1.52
Central American Bank for Economic Integration
Net loans 2,226 2,758 2,680 3,057 3,545 3,808 4,153 4,161 4,638 2,226 Paid-in 372 372 372 384 404 420 427 447 451 372 Retained earnings 706 800 936 993 1,049 1,122 1,286 1,357 1,471 706
RBCR 2.07 2.35 2.05 2.22 2.44 2.47 2.42 2.31 2.41 2.07
RBCR = risk-bearing capital ratio.
Note: RBCR is the ratio between net outstanding loans and the sum of paid capital and retained earnings.
Source: Annual financial statements of institutions.
First, the IDB and SRDBs have expanded their net outstanding loans to the region, but those of the SRDBs have grown at a faster pace. While IDB net loans to the region grew 42%
between 2002 and 2010, net loans from SRDBs grew steadily and more than doubled—the CAF’s loans expanded by 145%, CDB’s by 115%, and CABEI’s by 108%. The IDB experienced a slowdown after 2003, and its net loans to the region only recovered after the global financial crisis. Second, retained earnings have followed a similar trend: they are growing for all MDBs in the region, but those of SRDBs are growing at a faster pace.
Third, the RBCR indicates that there is enough room for MDBs to increase their lending without compromising the strength of their financial ratios. A high RBCR indicates high leverage, and a low RBCR indicates additional room to increase lending compared to levels of operating capital. This ratio has followed a common pattern: RBCRs reached a peak around
5 The RBCR is the ratio between net outstanding loans and the sum of paid-in capital and retained earnings. It is an index to measure the leverage capacity of financial institutions.
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2002 for most MDBs and have not since regained that level, even though MDBs increased lending due to the global financial crisis. The CAF, for example, has been increasing leverage and rapidly catching up to levels of the World Bank and the IDB. It is worth noting that commercial lending institutions normally have RBCR levels of 5–10, which is an indication of the prudential lending standards of MDBs.
Financial strength and prudential lending standards are key characteristics of the MDBs’
model. Because of a combination of comfortable financial levels in MDBs and a higher capacity to mobilize resources in LAC countries, early in the 2010s there is an opportunity to take more risks and experiment and innovate with new approaches. An extra opportunity is presented by historically low interest rates, and central banks such as the US Federal Reserve have indicated their willingness to maintain rates at these levels as the economies need additional support.
Figure 8 shows average lending rates of the World Bank and the IDB during 2003–2011. The global financial crisis caused a structural change in the price of London interbank offered rate (LIBOR)-based instruments for both banks, which have been stable at around 1% since 2008.
In parallel, sovereign spread (the difference between the interest rate of sovereign bonds and US Treasury bonds) have returned to precrisis levels, as has the Emerging Market Bond Index (EMBI+). Although they are not strictly comparable, margins between the lending interest rates of MDBs and the average cost of financing from international capital markets have returned to precrisis levels. As was the case before the financial crisis, some countries see no comparative advantage in MDB lending interest rates because they have cheaper options.
Therefore, this feature is also driving competition between MDBs and is providing MDBs with incentives to enter into more complex operations and expand their client base. SRDBs are experiencing similar pressures, but more data is needed.
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Figure 8: Average Lending Rates of Multilateral Development Banks, 2003–2011 (a) World Bank (b) Inter-American Development Bank
SCLs = Fixed single currency loans (in months)
Notes: * Fixed-rate single currency loans (SCLs) for loans where invitation to negotiate was extended on or after 31 July 1998. The structure type indicates the grace period and final maturity for each disbursed loan amount, as approved in the loan agreement. Thus, a "3/12" structure means a grace period of 3 years and a final maturity of 12 years for each disbursed loan amount whose rate has been fixed.
LIBOR-based SCLs for loans where invitation to negotiate was issued on or after 23 July 2009.
LIBOR-based SCLs for loans signed on or after 28 September 2007.
LIBOR-based SCLs for loans where invitation to negotiate was issued on or after 31 July 1998 and signed before 28 September 2007.
Source: IDB and World Bank annual reports.
Interest rates from other financial sources and MDBs were converging before the global financial crisis and most banks adjusted their internal costs so they could offer lower prices to their clients, e.g., they have adjusted front-end fees and lending spreads (Figure 8b shows these changes for the IDB). Nevertheless, this is not a sustainable strategy in the long term because development interventions tend to increase in cost as they become more complex.
For example, the World Bank performs periodic analysis of its internal costs of lending instruments, and there is evidence that supervision costs for investment loans has increased over the years.6
6 World Bank (2009, 31) indicates that “between FY04 and FY09, expenditure on supervision of the IBRD portfolio increased at around 3.6% a year, effectively flat in real terms; supervision costs for the IDA [International Development Association] portfolio increased by 9.2% a year over the same period. The net effect was to increase total supervision costs by $51.0 million.”
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Although there is no data to compare administrative costs between MDBs, it is safe to affirm that administrative costs are higher as operations become more complex and competition between institutions increase. For example, decentralizing operations at the IDB after the process of realignment has implied an important reallocation of personnel and, thus, higher administrative costs, at least in the short term. But these investments are crucial to improve operations. The challenge is whether smaller MDBs are able to follow this trend. The CAF has been able to mobilize resources from extraregional partners such as the PRC and Brazil, and it is heavily investing in creating capacities for research in development topics and new approaches, attracting talent, and decentralizing offices.
A similar argument for collaboration can be made in the case of the focus on development effectiveness that most MDBs are implementing. Having impact on development indicators requires more complex operations, a stronger focus on evaluation and monitoring, enhanced institutional skills to measure internal operations, and trained personnel to carry out these tasks. It is clear that this focus relates to higher administrative costs and, so far, only the World Bank and the IDB have actively engaged in implementing these reforms (IDB 2012).
Therefore, increasing collaboration and utilizing cost-sharing schemes of MDBs in this area, particularly at the country level, may contribute to reducing costs of implementing operations with a stronger focus on development effectiveness.
Some areas with strong potential for cost sharing to advance in the area of development effectiveness are (i) discussing a common framework to assess development effectiveness at the country and institutional level to ensure adequate benchmarking; (ii) engaging SRDBs in furthering the development effectiveness agenda, such as agreeing on common country operation frameworks under the leadership of borrowing countries; (iii) investing resources in guaranteeing the “evaluability” of development projects; and (iv) promoting knowledge and discussions to disseminate evidence-based interventions that can be later implemented by several MDBs in their respective subregions. The IDB and the World Bank are already implementing periodic reviews of their development effectiveness role with adequate resources and broad analysis of their operations. SRDBs need to catch up and other banks can collaborate efficiently to achieve this aim.
Some areas of research emerge regarding the delicate balance that MDBs need to find between financial strength, innovation capacity to provide services at competitive costs, and their impact on development. First, there is almost no work on comparing unitary costs of providing certain types of services across banks. Second, MDBs need to systematize their knowledge of implementing development effectiveness in their institutions, estimate their costs to implement these reforms, and estimate changes in development effectiveness with comparable indicators across institutions. Third, more work is needed to systematize innovations in MDBs that contribute to reduced administrative costs or increased development effectiveness. SRDBs are generally catching up quickly, but further systematization and dissemination efforts of these innovations can increase collaboration between SRDBs and the main banks.
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3.3 Net Income Distribution: Where Policy and Politics Meet in